Monday 15 October 2012 02.00 EDT
First published on Monday 15 October 2012 02.00 EDT

On Friday 18 February 1983, a shipment of 200 Sterling sub-machine guns was seized by Customs at the deep water docks in Greenwich, south-east London. The guns were labelled as bound for Jordan, but Customs officers suspected they were a sanctions-busting consignment destined for Saddam Hussein's Iraq.

The seizure of the weapons was to cause panic in Whitehall, leaving a trail of dirty washing exposed by chance a decade later by Lord Scott's arms-to-Iraq inquiry. Scott was so shocked about what he discovered that he described the actions of senior British government officials involved in the affair as "disgraceful".

The raid led to what Whitehall eventually admitted was a serious miscarriage of justice, which has never been fully reported until now.

Among those arrested in early 1983 was James Edmiston, managing director of the Sterling Armament Company whose famous guns were used by armed forces throughout the world worldwide – and in James Bond films.

It has taken Edmiston 25 years, through divorce and bankruptcy and a marathon struggle in the courts with his lawyer Lawrence Kormornick, to win compensation. When he finally did so, his award was a record, well over £2m, under a scheme for victims of miscarriages of justice that has now been scrapped.

At their Old Bailey trial in 1985, Reginald Dunk, the arms dealer who arranged the shipment of Sterling machine guns, pleaded guilty to trying to break the export ban on arms to Iraq. But the jury could not agree about Edmiston's role and he was acquitted.

The damage to his reputation had already forced Edmiston to sell Sterling. The prosecution, and the publicity surrounding it, forced him to sell his Bentley and his Kensington mansion, before he was eventually declared bankrupt.

As he looked around for jobs – he applied for one on the island of St Helena, another as curator of the cricket museum at Lords – his lawyer stuck by him. Kormornick had acted for Dunk who in 1999, 16 years after he was arrested, was awarded £2.2m in compensation for his wrongful conviction.Scott had discovered that Customs and the Foreign Office (FCO) had persuaded Iraqi and Jordanian diplomats to renege on their promise to give evidence for Dunk. A document released to the Scott inquiry revealed how one top FCO official told a colleague: "I confess to innocent reluctance to connive at impeding the course of justice." Scott was not amused, describing the UK diplomats' action "thoroughly reprehensible".

The case was one of a string of "arms-to-Iraq" prosecutions brought by Customs which collapsed or were later quashed on appeal, at a cost to British taxpayers of £50m.

"If you can stick it out and have a good case, you will win through," Dunk had said. "You may not come out of it unscathed, but it may be worth it, just to know you have beaten the bastards." Encouraged by this reward for perseverance, Kormornick pursued Edmiston's case.

He persuaded the then home secretary David Blunkett that Paul Henderson, managing director of the machine tool firm Matrix Churchill, should be compensated for being wrongfully charged. His trial collapsed after Alan Clark, Thatcher's maverick trade minister, admitted he had privately encouraged the company to sell banned goods to Iraq and after it emerged that MI6 had asked him to spy on its behalf when he visited Iraq on sales trips.

Henderson was compensated under a century-old voluntary scheme whereby, at the discretion of the home secretary, individuals qualified if they had been wrongfully charged and held in custody. The scheme did not lay down any time limit for being held in custody; for Henderson, it was one night in a cell as he awaited his bail surety; for Edmiston, it was the time he spent in the Old Bailey dock during his trial.

In 2005, the new home secretary, Charles Clarke, agreed that Edmiston should be compensated with no admission of liability on the government's part. Three years later, Edmiston, finally received the money. Neither Edmiston nor Kormornick will say how much, though it is understood to be well in excess of the £2.2m awarded to Dunk.

"James suffered a double injustice: wrongful charge and waiting 25 years for justice to be done," says Kormornick. "But he never received an apology and that's now long overdue."

Edmiston, now 70, lives in Cornwall, once again making guns. Clarke ended the discretionary scheme a year after agreed Edmiston should be compensated under it.